How To Take Advantage of the First Lien Position 504 Loan Pool Guarantee Program

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On May 13th, 2010, the Small business Administration (SBA) announced the start of the Secondary Market First Lien Position 504 Loan Pool Guarantee (504 LPG). The 504 LPG was created by the American Recovery and Reinvestment Act of 2009 to bring liquidity to lenders who make loans under SBA's long-standing 504 Loan Program, which provides long-term financing for small businesses.

Prior to the credit freeze of 2008-2009 lenders of the 504 First Mortgage enjoyed an active secondary market. The SBA launched the 504 LPG to address the lack interest on the investor side by allowing for the creation of guaranteed pools of loans. The program is a bit different than the SBA's standard guarantee programs: the guarantee does not protect the originator like with the 7(a) program, instead the guarantee benefits the pool investor.

The guarantee becomes active once 2 or more loans are placed in a pool. Further, the originator cannot own a pool of loans that they originated. Only the holder/investor in the pool is the direct beneficiary of the guarantee. And although the originator does not benefit directly from the guarantee, they do benefit greatly from the increased investor demand that the program will generate.

How Can Lender's take advantage of this program?
There are Three Options for Liquidity on 504 First Mortgages:

Sell 100% of the 504 1st
The lender sells 100% of the loan to an investor.

Pros:

Very little work on the part of the lender

Instant liquidity for loans that qualify

Cons:

Limited buy-side interest. Only Zions is actively buying, although past buyers are evaluating a return to the market.

Limited demand delivers lower premiums

Full underwriting required by buyer as the buyer is not purchasing a guaranteed product

Who can sell: Any lender with qualifying 504 1st loans may sell their loans.

Who can buy: Any investor may purchase 100% of a 504 1st loan.

Sell 85% of a loan to a pool originator
Selling 85% of a loan to a pool originator who is required to retain 5% at risk. This means the Investor retains 5% and pools the remaining 80% with additional 80% pieces of other loans to make a pool which is a 100% guaranteed by the SBA.

Pros:

Opportunity for near instant liquidity

Servicing income

Relationship with the client

Cons:

Pool Originator must conduct underwriting as they retain an 5% at-risk piece

Who can sell: Any lender with qualifying 504 1st loans may sell their loans.

Who can buy: Any investor may purchase the 85% portion of a 504 1st and create a pool. However, the Investor must attain a pool originator license from the SBA.

Sell a pool of 504 1st loans with a 100% guarantee
Lender acts as a Pool Originator and sells off a guarantee pool. The pool consists of 80% portions of at least two 504 1st loans and retains a 20% at-risk portion of each loan.

Pros:

Most SBA market-makers expect to have a bid on the full-faith portion delivering more demand and likely higher premiums. Market makers, such as SBA Pool Assemblers, are setup to purchase and place this type of product.

Cons:

Lender must complete SBA application to become a pool originator

Who can sell: Any lender with qualifying 504 1st loans may sell their loans. However, they need to first attain a pool originator license from the SBA (no fee for applying).

Who can buy: Any investor may purchase a pool of 504 1st loans with a 100% guarantee.